March 7, 2012
The Great Price Increase Pushback
Around 20 years ago, a buyer with a leading grocery chain explained consumer packaged goods (CPG) company pricing to me. "What goes up (prices), never comes back down." He then pointed to a number of companies who took prices up over a period of years, usually citing higher commodity costs as the justification. He then asked me, rhetorically, why if prices went up with commodities did they never go back down even when retreating to pre-increase levels.
To be fair, many CPG manufacturers often hold pricing while increased costs cut into their bottom line. When they do raise prices to distributors and consumers, they are often trying to recoup some of the dollars already lost.
All of this leads to the most recent reports of retailers pushing back against increases. In the past, some merchants have flat out refused to purchase products at higher prices. Typically, these are the biggest retailers such as Costco, Dollar General, Kroger, Walmart, etc. But most retailers and wholesalers simply don’t have the wherewithal to stop doing business with all but the smallest brands in any given category.
A recent Reuters report concludes that Walmart is putting pressure on suppliers to hold the line on pricing.
"We want to work with vendors on that to see if we can take a price lower and leave it there permanently," Charles Holley, chief financial officer of Walmart, told reporters, according to Reuters. "The price image for a customer is very important."
Walmart’s stance could be good news for other retailers as vendors may be forced to maintain current pricing rather than get on bad terms with their largest account.
On the possible downside, brands that decide they can’t take prices up often choose to either downsize packaging or reduce promotional spending at retail. In a business, particularly among hi-lo operators, that is so driven by deals, this could have a negative effect.
"I think we reached the wall in terms of raising price. Consumers can’t take any more," Edward Jones analyst Jack Russo told Reuters.
"A lot of these companies are going to have to get back to basics and not raise prices much, and if they want to grow sales they’re going to have to do it through innovation, or being razor-sharp on pricing," Mr. Russo added.
Many manufacturers may have gotten at least a brief respite from price pressures. According to the Bureau of Labor Statistics’ Producer Price Index, prices for consumer foods decreased 0.9 percent in December and then 0.3 percent in January. Energy prices were down for the fourth month in a row in January, declining 0.5 percent although fuel prices have begun to increase of late.
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Discussion Questions
Discussion Questions: Have consumers “reached the wall” in terms of price increases? What should retailers do if manufacturers come to them with price hikes?
Poll
I don’t think we’ve reached the wall on price increases. Yes, everyone would like lower prices. That doesn’t mean we’re going to stop buying the basics if prices rise. We’ve got a long way to go before we see category price elasticity kick in for consumer package goods. That said, the higher-priced products in a category need to be careful and test increases before going to market with them.
There was a period of about 18 months where supermarket retailers weren’t routinely passing along price increases but taking narrower margins. The majority now seem to be passing increases along. A majority of vendors I polled recently said they were passing along increases, but working harder than ever to cost-justify them. They tell me that customers are more demanding for proof of the need for an increase, and even want to see proof that the manufacturer/vendor is making investments in efficiency/energy usage to keep their own costs down, as in “Why should I pay for your inefficiency? Get your house in order so that you are operating as efficiently and as cheaply as possible so you can pass on savings to me.” One warehouse operator told me that when customers tour his facilities, he is concerned about there being anything amiss, for fear of the customer pointing to it and complaining.
Pay it. If the brand has value to your assortment and you feel they are an ethical company to deal with, then you don’t quibble over pennies.
Consumers have “Reached the wall”? Really? They can’t go any further on buying? So they won’t put gas in their cars, buy makeup, or plastic bags? Please, let’s stop with they hyperbole.
I get the sense that CPGs have been somewhat insulated from the harsh vagaries of the recessionary market. I understand that fuel and commodity prices are on the increase and their cost of goods has risen. But I wonder if CPGs have worked as hard as Walmart and other retailers have in terms of cutting costs and making their operations more efficient to keep prices in check.
If that is the case, my apologies to you CPG folks, but I don’t get the sense that there is same level of urgency to keep prices down on the manufacturing side, vis-a-vis their retailer partners.
Retailers have some leverage. In addition to refusing to accept higher prices, store brands become a significant alternative for retailers who have strong private label programs. Consumers are receptive to trading down and economizing if necessary.
To answer the question, “have shoppers reached the wall”? YES and many are starting to jump off the top of it!
What happened to many midtier apparel stores in 2011 as a response to higher cotton prices should be a cautionary tale for any CPG marketer or retailer. They were faced with a choice between raising prices (which almost immediately put a dent into their sales) and absorbing lower margins in order to protect the top line. The customer doesn’t understand — or care about — the worldwide commodity market, but she does grasp the right price to pay for a cotton t-shirt.
In an age of increased consumer empowerment — typified by the QR scanners on all those smartphones out there — retailers need to be extremely careful about raising prices, or they need to find offsetting cost savings in the supply chain to protect both sales and margins.
Two-tier pricing helps to offset pass-through increases. If the manufacturer seeks an increase due to higher cost to produce, package and deliver the goods they either have to pass the increase along to the point of distribution (grocery in this example) or the grocer can “eat it,” or they can go high/low with the non-participant in the shopper program paying higher price. Over time, the channel can and will adjust the “low” up — so the differential is not as great.
Membership clubs — Costco, Sam’s Club, BJ’s, and others have become dominant over the past 15 years for just this reason — buying leverage combined with consumer sensitivity to price. Pass-through increases are not tolerable in some categories of merchandise and so consumers are willing to lug home a gallon bottle of Tide or 48 rolls of toilet paper. At the same time, when the BP Oil spill happened for some odd reason the cost of farm-raised salmon went up $2.00/lb. Go figure; it had nothing to do with pass-through from the farm, and everything to do with opportunistic price gouging. Correspondingly the cost of that salmon at my Costco has not gone down to pre-BP levels — hmmmm.
It depends on what type of product. For commodity types of items and brands, the consumer might have reached the wall. However, there are many types of products and brands that are not price sensitive and retailers are foolish not to recognize the difference.
Consumers are captive to “necessary conditions.” Remember when the U.S. Postal Service promised us that stamp prices would never go up again? That was few price increases ago. Or when an airport parking facility promised that a price increase would be temporary and then rescinded after remodeling or upgrading? Ha. We still need stamps for a while and airport parking is necessary for travelers.
Consumers of food products have a few more options re price hikes. They can switch to a lower priced item or stop buying an item. But those aren’t preferred or happy options. While consumers may be battle weary from price increases, life goes on as consumers live on as affected victims, as they still drive to the store in cars powered by ever-increasing gas prices.
Retailers must tell manufacturers that price hikes are no longer willingly accepted. That will put more focus on seeking ways to curb excessive price hikes. That won’t cure the problem. So pray for good luck.
“The wall” is an issue when a) the price goes up AND b) the product is downsized. The most recent illustration is the nearly-single-serving Girl Scout cookie box, which sells for a whopping $4. Customers hate “cheater packs,” and there seem to be plenty of grocery shoppers spending more time in the store examining unit pricing labels. Brands risk hurting their reputations by trying to fool the customer.
Consumers have reached “the wall”? Why not ask if they’ve reached “the dark side of the moon.”
A basic tenet of consumer research goes something like this: don’t bother asking what they think about price; you already know the answer. If the first question came out of left field, the second question must have been thrown in from the bleachers. Margin pressure has been a fact of life for all for three years. The best answer is: there is no best answer.
This comment is complete BS:
“I think we reached the wall in terms of raising price. Consumers can’t take any more,” Edward Jones analyst Jack Russo told Reuters.
I’ll believe it when people have to limit their portion size because of the cost of food, and the nation’s obesity problem subsides.
This discussion on pricing is a slippery slope and in my opinion threatens the overall US economy if not treated with respect. When Walmart and others demand a lower price “permanently” (which is totally unrealistic) it really applies pressure to the CPGs. For the CPG to continue to grow or even stay flat several levers are used. Package size is decreased, quality of ingredients used goes down, outsourcing manufacturing overseas and cuts to jobs, etc. All of these in the long run hurt the consumer and the US economy. Consumers work at manufacturing plants and businesses that are supported by those plants in the US. If those jobs are cut in favor of less expensive overseas manufacturing it increases US unemployment. When you use less expensive ingredients or fillers to cut costs, it threatens the health of Americans.
Low prices are great. We all love a good/fair deal, but not at the expense of US jobs and our overall health. When people can’t find jobs it’s really hard to shop even if the prices are low.
No. Rising labor costs, material prices and other costs mean increased product prices. Someone, somewhere has to pay for this. If not the consumer, then who?
It is clear in this economic environment that real incomes are not increasing to match the rate of inflation. When you combine flat incomes with economic insecurity, you find that consumers are watching price trends of core products much more closely than they have in the past.
The greatest challenge in packaged goods is to successfully differentiate your product from the competition. Many products have sought differentiation primarily on brand image and value, and those are the brands that face increased commoditization in this competitive environment. The days when television advertising would justify a premium price are long gone.
Today, the greatest opportunities for growth for a package goods manufacturer come from displacing competition on the shelf, increasing the efficiency of trade spending, and gaining additional share of wallet from consumers driven by product innovation or promotional activity.
Retailers are correct to maintain a hard line with manufacturers about price increases, because the risk is both to the brand and to the retailer as well. If products are perceived to be overpriced that the retailer, those consumers may very well moved to Target or Walmart as alternatives, leaving not just the brand but the retailers a whole is well.
LOVE that comment by Per Sjofors! Let’s make this the new metric, for considering whether or not consumers have “hit the wall.”
Bad habits are hard to break. This is clearly demonstrated by the ones still working and largely unaffected by the present day economy. These Americans are still joy riding at a cost of $4.00/gallon and consuming lots of pleasure food and drink despite continuing large price increases. Walmart, on the other hand, is accustomed to telling their vendors the price they will pay and in many cases when they will pay. In this arena, food and beverages, they are the new guy with much to learn like the range of variable costs. In addition to this, they are realizing they are a small part of the market and perhaps not all that welcome. In the perishable commodity market, a large part of the cost of goods sold is the variable expense of expired merchandise. These costs are ever increasing without an ability to curtail the the number of causes which lead to the price increases. This is an interesting article for those that will visit again at regularly scheduled intervals. It has the potential to expose many of the unexpected surprises a company finds when they are confronted by unexpected changes in a new market and changing economy.
Consumers are going to continue to push back and the best way is via comparison shopping. Recently, I happened into a Kroger while visiting family 300 miles away and was shocked to see a 23 oz box of Bran Flakes selling for $1.79. My local Walmart sells the same thing for $2.59. I bought 10 boxes from Kroger. While in Walmart yesterday, I checked and their PL Bran Flakes are now $2.79. WHY? I have found Walmart to be a trusted supplier for a number of years, but I am pushing back and double checking the price on everything I used to buy there. The days of blindly picking up anything and putting it in the buggy are gone. If Kroger can sell it for $1.79 then I consider that ‘the fair price’. Others can meet it or lose my business.
To amplify Per Sjofors’s comments and to echo Warren’s endorsement of them, permit me to report once again something I’ve written in these spaces several times before: Research has consistently shown over decades that during difficult economic times families first cut back spending in the easiest and most immediate categories. This always includes food. Then, when they’ve had time to make adjustments in other areas of their budgets, they ALWAYS return to their previous levels of spending on, and consumption of, food.
Food, clothing and car prices are less of a percentage of income than in decades past. Gasoline? Well, that’s another topic. We’re talking CPG here. CPGers have actually done a fairly good job of absorbing raw materials, production, distribution, etc. costs. Food is still cheap compared to many regions of the world. Also, more US consumers have returned to higher-tier food item purchases in the past six months.
Consumers are truly just fine with prices, regardless of what the sensationalistic TV reports claim. Consumers are looking for value, however they are willing to spend if the value is perceived.
Retailers can work with CPGers to better reap benefits of purchase data analytics and make better collaborative decisions to balance inventory and ensure greater new product introduction success rates.
Consumers push back because they can and we’ve trained them to do so. Retailers push back because it’s their fiduciary responsibility to do so.
The important point is that we can’t place a product on the shelf and expect it to sell. There are a myriad of reasons why products are purchased. Being there may be the first reason; but it’s quickly becoming the last reason too.
It’s pretty important to recognize that not all prices are created equal, nor is all price sensitivity the same.
We have found that in the present economic climate, many consumers feel a need to restrain spending because their income has actually fallen. Others restrain spending as a hedge against future insecurity, without a concrete and immediate need to budget more stringently. The latter of these groups is always potentially price elastic in any given purchase instance — they simply need to feel that they are being “careful” overall.
Regarding the former, the truly constrained group, our work with store brands and sale pricing has shown that certain categories for any given consumer are “esteem/image reinforcers” — where occasional expenditures for higher priced brands with a perceived premium image is a part of all but the most absolutely depressed economic groups.
Thus, the issue of pricing is a complex one, without anything as simple and concrete as a “wall” in operation. Retailers need to understand their consumer franchise — and they need to understand the psychological mix of products in their inventory. Only then can intelligent pricing policies respond to consumer demands for careful spending.
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I don’t think we’ve reached the wall on price increases. Yes, everyone would like lower prices. That doesn’t mean we’re going to stop buying the basics if prices rise. We’ve got a long way to go before we see category price elasticity kick in for consumer package goods. That said, the higher-priced products in a category need to be careful and test increases before going to market with them.
There was a period of about 18 months where supermarket retailers weren’t routinely passing along price increases but taking narrower margins. The majority now seem to be passing increases along. A majority of vendors I polled recently said they were passing along increases, but working harder than ever to cost-justify them. They tell me that customers are more demanding for proof of the need for an increase, and even want to see proof that the manufacturer/vendor is making investments in efficiency/energy usage to keep their own costs down, as in “Why should I pay for your inefficiency? Get your house in order so that you are operating as efficiently and as cheaply as possible so you can pass on savings to me.” One warehouse operator told me that when customers tour his facilities, he is concerned about there being anything amiss, for fear of the customer pointing to it and complaining.
Pay it. If the brand has value to your assortment and you feel they are an ethical company to deal with, then you don’t quibble over pennies.
Consumers have “Reached the wall”? Really? They can’t go any further on buying? So they won’t put gas in their cars, buy makeup, or plastic bags? Please, let’s stop with they hyperbole.
I get the sense that CPGs have been somewhat insulated from the harsh vagaries of the recessionary market. I understand that fuel and commodity prices are on the increase and their cost of goods has risen. But I wonder if CPGs have worked as hard as Walmart and other retailers have in terms of cutting costs and making their operations more efficient to keep prices in check.
If that is the case, my apologies to you CPG folks, but I don’t get the sense that there is same level of urgency to keep prices down on the manufacturing side, vis-a-vis their retailer partners.
Retailers have some leverage. In addition to refusing to accept higher prices, store brands become a significant alternative for retailers who have strong private label programs. Consumers are receptive to trading down and economizing if necessary.
To answer the question, “have shoppers reached the wall”? YES and many are starting to jump off the top of it!
What happened to many midtier apparel stores in 2011 as a response to higher cotton prices should be a cautionary tale for any CPG marketer or retailer. They were faced with a choice between raising prices (which almost immediately put a dent into their sales) and absorbing lower margins in order to protect the top line. The customer doesn’t understand — or care about — the worldwide commodity market, but she does grasp the right price to pay for a cotton t-shirt.
In an age of increased consumer empowerment — typified by the QR scanners on all those smartphones out there — retailers need to be extremely careful about raising prices, or they need to find offsetting cost savings in the supply chain to protect both sales and margins.
Two-tier pricing helps to offset pass-through increases. If the manufacturer seeks an increase due to higher cost to produce, package and deliver the goods they either have to pass the increase along to the point of distribution (grocery in this example) or the grocer can “eat it,” or they can go high/low with the non-participant in the shopper program paying higher price. Over time, the channel can and will adjust the “low” up — so the differential is not as great.
Membership clubs — Costco, Sam’s Club, BJ’s, and others have become dominant over the past 15 years for just this reason — buying leverage combined with consumer sensitivity to price. Pass-through increases are not tolerable in some categories of merchandise and so consumers are willing to lug home a gallon bottle of Tide or 48 rolls of toilet paper. At the same time, when the BP Oil spill happened for some odd reason the cost of farm-raised salmon went up $2.00/lb. Go figure; it had nothing to do with pass-through from the farm, and everything to do with opportunistic price gouging. Correspondingly the cost of that salmon at my Costco has not gone down to pre-BP levels — hmmmm.
It depends on what type of product. For commodity types of items and brands, the consumer might have reached the wall. However, there are many types of products and brands that are not price sensitive and retailers are foolish not to recognize the difference.
Consumers are captive to “necessary conditions.” Remember when the U.S. Postal Service promised us that stamp prices would never go up again? That was few price increases ago. Or when an airport parking facility promised that a price increase would be temporary and then rescinded after remodeling or upgrading? Ha. We still need stamps for a while and airport parking is necessary for travelers.
Consumers of food products have a few more options re price hikes. They can switch to a lower priced item or stop buying an item. But those aren’t preferred or happy options. While consumers may be battle weary from price increases, life goes on as consumers live on as affected victims, as they still drive to the store in cars powered by ever-increasing gas prices.
Retailers must tell manufacturers that price hikes are no longer willingly accepted. That will put more focus on seeking ways to curb excessive price hikes. That won’t cure the problem. So pray for good luck.
“The wall” is an issue when a) the price goes up AND b) the product is downsized. The most recent illustration is the nearly-single-serving Girl Scout cookie box, which sells for a whopping $4. Customers hate “cheater packs,” and there seem to be plenty of grocery shoppers spending more time in the store examining unit pricing labels. Brands risk hurting their reputations by trying to fool the customer.
Consumers have reached “the wall”? Why not ask if they’ve reached “the dark side of the moon.”
A basic tenet of consumer research goes something like this: don’t bother asking what they think about price; you already know the answer. If the first question came out of left field, the second question must have been thrown in from the bleachers. Margin pressure has been a fact of life for all for three years. The best answer is: there is no best answer.
This comment is complete BS:
“I think we reached the wall in terms of raising price. Consumers can’t take any more,” Edward Jones analyst Jack Russo told Reuters.
I’ll believe it when people have to limit their portion size because of the cost of food, and the nation’s obesity problem subsides.
This discussion on pricing is a slippery slope and in my opinion threatens the overall US economy if not treated with respect. When Walmart and others demand a lower price “permanently” (which is totally unrealistic) it really applies pressure to the CPGs. For the CPG to continue to grow or even stay flat several levers are used. Package size is decreased, quality of ingredients used goes down, outsourcing manufacturing overseas and cuts to jobs, etc. All of these in the long run hurt the consumer and the US economy. Consumers work at manufacturing plants and businesses that are supported by those plants in the US. If those jobs are cut in favor of less expensive overseas manufacturing it increases US unemployment. When you use less expensive ingredients or fillers to cut costs, it threatens the health of Americans.
Low prices are great. We all love a good/fair deal, but not at the expense of US jobs and our overall health. When people can’t find jobs it’s really hard to shop even if the prices are low.
No. Rising labor costs, material prices and other costs mean increased product prices. Someone, somewhere has to pay for this. If not the consumer, then who?
It is clear in this economic environment that real incomes are not increasing to match the rate of inflation. When you combine flat incomes with economic insecurity, you find that consumers are watching price trends of core products much more closely than they have in the past.
The greatest challenge in packaged goods is to successfully differentiate your product from the competition. Many products have sought differentiation primarily on brand image and value, and those are the brands that face increased commoditization in this competitive environment. The days when television advertising would justify a premium price are long gone.
Today, the greatest opportunities for growth for a package goods manufacturer come from displacing competition on the shelf, increasing the efficiency of trade spending, and gaining additional share of wallet from consumers driven by product innovation or promotional activity.
Retailers are correct to maintain a hard line with manufacturers about price increases, because the risk is both to the brand and to the retailer as well. If products are perceived to be overpriced that the retailer, those consumers may very well moved to Target or Walmart as alternatives, leaving not just the brand but the retailers a whole is well.
LOVE that comment by Per Sjofors! Let’s make this the new metric, for considering whether or not consumers have “hit the wall.”
Bad habits are hard to break. This is clearly demonstrated by the ones still working and largely unaffected by the present day economy. These Americans are still joy riding at a cost of $4.00/gallon and consuming lots of pleasure food and drink despite continuing large price increases. Walmart, on the other hand, is accustomed to telling their vendors the price they will pay and in many cases when they will pay. In this arena, food and beverages, they are the new guy with much to learn like the range of variable costs. In addition to this, they are realizing they are a small part of the market and perhaps not all that welcome. In the perishable commodity market, a large part of the cost of goods sold is the variable expense of expired merchandise. These costs are ever increasing without an ability to curtail the the number of causes which lead to the price increases. This is an interesting article for those that will visit again at regularly scheduled intervals. It has the potential to expose many of the unexpected surprises a company finds when they are confronted by unexpected changes in a new market and changing economy.
Consumers are going to continue to push back and the best way is via comparison shopping. Recently, I happened into a Kroger while visiting family 300 miles away and was shocked to see a 23 oz box of Bran Flakes selling for $1.79. My local Walmart sells the same thing for $2.59. I bought 10 boxes from Kroger. While in Walmart yesterday, I checked and their PL Bran Flakes are now $2.79. WHY? I have found Walmart to be a trusted supplier for a number of years, but I am pushing back and double checking the price on everything I used to buy there. The days of blindly picking up anything and putting it in the buggy are gone. If Kroger can sell it for $1.79 then I consider that ‘the fair price’. Others can meet it or lose my business.
To amplify Per Sjofors’s comments and to echo Warren’s endorsement of them, permit me to report once again something I’ve written in these spaces several times before: Research has consistently shown over decades that during difficult economic times families first cut back spending in the easiest and most immediate categories. This always includes food. Then, when they’ve had time to make adjustments in other areas of their budgets, they ALWAYS return to their previous levels of spending on, and consumption of, food.
Food, clothing and car prices are less of a percentage of income than in decades past. Gasoline? Well, that’s another topic. We’re talking CPG here. CPGers have actually done a fairly good job of absorbing raw materials, production, distribution, etc. costs. Food is still cheap compared to many regions of the world. Also, more US consumers have returned to higher-tier food item purchases in the past six months.
Consumers are truly just fine with prices, regardless of what the sensationalistic TV reports claim. Consumers are looking for value, however they are willing to spend if the value is perceived.
Retailers can work with CPGers to better reap benefits of purchase data analytics and make better collaborative decisions to balance inventory and ensure greater new product introduction success rates.
Consumers push back because they can and we’ve trained them to do so. Retailers push back because it’s their fiduciary responsibility to do so.
The important point is that we can’t place a product on the shelf and expect it to sell. There are a myriad of reasons why products are purchased. Being there may be the first reason; but it’s quickly becoming the last reason too.
It’s pretty important to recognize that not all prices are created equal, nor is all price sensitivity the same.
We have found that in the present economic climate, many consumers feel a need to restrain spending because their income has actually fallen. Others restrain spending as a hedge against future insecurity, without a concrete and immediate need to budget more stringently. The latter of these groups is always potentially price elastic in any given purchase instance — they simply need to feel that they are being “careful” overall.
Regarding the former, the truly constrained group, our work with store brands and sale pricing has shown that certain categories for any given consumer are “esteem/image reinforcers” — where occasional expenditures for higher priced brands with a perceived premium image is a part of all but the most absolutely depressed economic groups.
Thus, the issue of pricing is a complex one, without anything as simple and concrete as a “wall” in operation. Retailers need to understand their consumer franchise — and they need to understand the psychological mix of products in their inventory. Only then can intelligent pricing policies respond to consumer demands for careful spending.